Tax Evasion vs. Tax Avoidance

Tax avoidance and tax evasion are the two ways by which tax payers try to reduce the amount they have to pay to the Bureau of Internal Revenue. While both these terms have the same objective, tax avoidance and tax evasion differ in the means by which the purpose of paying lesser amount of tax is obtained.

What is tax avoidance?

This is the means by which tax payers try to reduce tax within the means allowed by law. Tax avoidance should me made in good faith and at arms length, otherwise it will not be regarded as such.

What is an example of tax avoidance?

A good example of tax avoidance is the use of the depreciation method in claiming deductible expenses to lessen the income tax.

What are the elements of tax evasion?

Tax evasion connotes the integration of three factors: (1) end to be achieved, i.e. the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that the tax is due; (2) an accompanying state of mind which is known as “evil,” in “bad faith,” “willful,” or “deliberate and not accidental”; and (3) a course of action or a failure of action which is unlawful.

What is tax evasion?

Tax evasion is the opposite of tax avoidance. Under this scheme, the taxpayer employs means outside the lawful means and will merit the tax payer civil and even criminal sanctions for his fraudulent acts.

What is an example of tax evasion?

A simple example of this method is the understatement by the tax payer of his revenues in order to minimize or reduce the taxes which will be imposed thereon. As an illustration, Mr. Salazar reported only Php1 million as his income when in truth he was able to earn Php10 million.

The case of Commissioner of Internal Revenue vs. The Estate of Benigno P. Toda et al, decided by the Supreme Court on 14 September 2004, is illustrative of the concepts of tax evasion and tax avoidance. In the said case Cibeles Insurance Corporation (CIC) authorized Benigno P. Toda, ?President and owner of 99.9% of its issued and outstanding capital stock to sell the Cibeles Building, located in Ayala Avenue, to a certain Rafael Altonaga for Php100 million. The latter sold the building to RMI for Php200 million. This transaction was evidenced by Deeds of Absolute Sale notarized by the same notary public on the same day.

The Court noted that Mr. Altonaga was a mere dummy and that the transaction was actually between CIC and RMI. CIC sought to avoid the payment of corporate income tax on the additional Php100 million by changing the income from income structure from corporate income tax to individual capital gain. Thus, the whole transaction was considered as tax evasion and not a mere tax avoidance.

Author: Atty. James Biron
Atty. James S. Biron is a corporate lawyer specializing in foreign investments, trade, mergers and acquisitions, planning and financing of projects and capital raising. Clients served include real estate, construction, energy, information technology, agriculture, education, medical and casino gaming companies.


Leave a Reply